CRA Modernization and Auto Lending: Banking Agencies Seek Feedback by August 5, 2022

The Community Reinvestment Act (CRA) became law in 1977 and remains one of the seminal pieces of legislation to address systemic inequities in access to credit for low- and moderate-income (LMI) communities. The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (together, the “agencies”) recently issued a Notice of Proposed Rulemaking (NPR) that proposes to update regulations implementing the CRA.

The agencies invite public comment on the NPR through August 5, 2022. This post encourages all stakeholders to comment on any and all aspects of the NPR, briefly explains how to do so most effectively, and highlights some aspects of the NPR related to automobile lending.

For more information about automobile lending, please see our blog post about the importance of car loans for people with low- and moderate-incomes.

Submitting an effective comment letter by August 5

• August 5 deadline. Each of the three agencies will accept comments received on or before August 5, 2022.
• Effective comments. A comment is most effective when it is submitted as a comment letter pursuant to the instructions, describes a concern the regulations can address, and analyzes the pros and cons of different policy options for addressing that concern.
• Instructions for submitting comments. The NPR describes how to submit a comment to each of the three agencies. Comments can be submitted to any of the three agencies and all comments will be shared among the agencies.
• Learn more. The agencies released a Community Reinvestment Act Proposal Fact Sheet, which lists key elements of the NPR, including to provide greater clarity, consistency, and transparency. They also released a Summary of Key Objectives, which lists eight key objectives and describes how the NPR achieves each one. The agencies held a webinar, “Ask the Regulators: CRA Reform Update: Overview of the Interagency CRA Notice of Proposed Rulemaking,” that provides an overview of the entire NPR. Finally, please see this CDPS blog post to learn more about some aspects of the NPR that involve community development.

The agencies seek feedback on any and all aspects of the NPR, including the following issues that may be relevant to stakeholders interested in automobile lending.

Agencies seek comments on evaluation of automobile lending

• Evaluating banks’ auto lending. In recognition of the importance of automobile loans to low- and moderate-income borrowers, the agencies propose including a bank’s automobile lending under a metrics-based Retail Lending Test.¹
• The agencies intend for the Retail Lending Test to measure how well a bank’s retail lending meets the credit needs of low- and moderate-income individuals, and low- and moderate-income geographies through analysis of lending volume and lending distribution.²
• Automobile loans would be the only type of consumer lending evaluated under the Retail Lending Test. Other types of consumer loans would be considered qualitatively under the Retail Services and Products Test.
• The agencies explain that automobile loans can be important in areas where jobs are at a significant distance from where people reside and where public transportation is not readily available; and that safe and sound automobile loans can also serve as a means of building a credit history.
• Major product line standard. For banks evaluated under the Retail Lending Test, the NPR would standardize when a bank is evaluated on a specific retail product line.
• For automobile lending, the proposal would establish a major product line threshold of 15% based on the average of two percentages in the relevant area:
• The bank’s percentage of automobile retail lending dollars out of total retail lending dollars; and
• The bank’s percentage of automobile loans by loan count out of total retail loan count.
• The NPR includes an example where a bank’s automobile lending accounts for 10% of its total retail lending dollars and 22% of its total retail loans by loan count in an applicable geographic area. Thus the bank’s combined percentage would be 16%, and its automobile lending would be evaluated as a major product line. The agencies explain that this approach would help account for the lower dollar value of automobile loans, while recognizing that automobile loans can fulfill unique and important credit needs for low- and moderate-income borrowers and communities.
• Borrower and geographic metrics. The agencies propose using a set of geographic distribution and borrower distribution metrics to measure bank performance for each major product line. The geographic distribution metrics measure the level of bank lending in low-income and moderate-income census tracts in an assessment area. For automobile lending, the borrower distribution metrics measure the level of lending to low- and moderate-income borrowers.
• New data collection, maintenance, and reporting. To obtain the required information to create the metrics, the agencies propose requiring new automobile lending data collection, maintenance, and reporting by banks with assets of over $10 billion.
• The agencies explain that this new data reporting is necessary because credit reporting agency data and other existing market sources lack the comprehensiveness required to construct the necessary metrics to evaluate automobile lending.
• Collecting and maintaining automobile lending data would be optional for small banks that elect evaluation under the Retail Lending Test, for intermediate banks, and for banks with assets of $10 billion or less.
• The NPR notes that although limiting data collection and reporting requirements for automobile lending to only banks with assets of over $10 billion would have the benefit of tailoring these requirements such that they do not apply to banks under this asset level, it would also lead to less comprehensive metrics for all banks, particularly in areas where banks with assets of over $10 billion have a low market share of bank automobile lending.
• The proposal specifies the necessary data to analyze CRA performance for automobile loans are: loan amount at origination, loan location (state, county, census tract), and borrower income.

The NPR includes specific requests for feedback on the following questions pertaining to automobile loan evaluation under the proposed Retail Lending Test:

• Do the benefits of evaluating automobile lending under the metrics-based Retail Lending Test outweigh the potential downsides, particularly related to data collection and reporting burden? In the alternative, should the agencies adopt a qualitative approach to evaluate automobile lending for all banks under the proposed Retail Lending Test? (Question 66)
• Should the agencies use a different standard for determining when to evaluate automobile loans? (Question 70)
• Should automobile lending for all banks be evaluated using benchmarks developed only from the lending of banks with assets of over $10 billion? (Question 79)
• Should large banks with assets of $10 billion or less be required to collect, maintain, and report automobile lending data? If so, would a longer transition period for large banks with assets of $10 billion or less to begin to collect, maintain, and report automobile lending data (such as an additional 12 or 24 months beyond the transition period for large banks with assets of over $10 billion) make this alternative more feasible? Does the added value from being able to use these data in the construction of metrics and benchmarks outweigh the burden involved in requiring data collection and reporting by these banks? (Question 158)
• Should the agencies streamline any of the proposed data fields for collecting and reporting automobile data? If so, would it still allow for constructing comprehensive automobile lending metrics? (Question 159)
• Should the agencies consider publishing county-level automobile lending data in the form of a data set? (Question 160)

Conclusion

We encourage stakeholders to take advantage of this rare opportunity to contribute to CRA reform by submitting a comment letter to the agencies. Lael Brainard, vice chair of the Board of Governors of the Federal Reserve, emphasized this opportunity in her statement on the NPR: “We look forward to hearing from stakeholders on how we can work together to support financial inclusion and access to credit in all of America’s communities,” said Brainard.

Notes

¹ The agencies propose defining an automobile loan as a consumer loan extended for the purchase of and secured by a new or used passenger car or other vehicle for personal use.

² Automobile lending is one of six retail product lines that would be evaluated under the metrics-based Retail Lending Test. The other five retail product lines that would fall under the proposed Retail Lending Test are: closed-end home mortgage loans, open-end home mortgage loans, multifamily loans, small business loans, and small farm loans.

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.